Information Uncertainty and Stock Returns

Abstract

There is substantial evidence of short-term stock price continuation, which prior literature often attributes to investor behavioral biases such as underreaction to new information. This paper investigates the role of information uncertainty in short-term CAPM anomalies and cross-sectional variations in stock returns. If short-term price continuation is due to investor behavioral biases, we should observe greater price drift when there is greater information uncertainty. As a result, greater information uncertainty produces relatively higher expected returns following good news and relatively lower expected returns following bad news. The evidence presented in this paper supports this hypothesis.